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that occur on or after Jan. 1, 2023 constitute Subpart F income or income
(Regs. Sec. 1.1446(f)-3(f)). effectively connected with a U.S. trade
Sec. 1446(f) is a or business. (It would not be taken into
Implications collection mechanism account under Sec. 965 or the GILTI
The securities industry has consistently for Sec. 864(c)(8). regime, and it could fund a dividend to
told the government that it needs about the Sec. 245A shareholder for which
18 months to implement a complicated It generally requires the shareholder might be allowed an
transferees purchasing
new regime, but it was only given about offsetting deduction under Sec. 245A.)
15 months from the release of the regu- interests in such Additionally, the increased basis attrib-
lations in October 2020 to the previous utable to the transaction might give rise
partnerships from
effective date of Jan. 1, 2022. There to depreciation or amortization deduc-
are many unique challenges in imple- non-US transferors to tions or qualified business asset invest-
menting Sec. 1446(f) on PTP interest ment that would reduce the Sec. 245A
transfers, and the industry can put the deduct and withhold shareholder’s overall GILTI inclusion
additional time to good use. a 10% tax from the amount. Many Sec. 245A shareholders
The extension buys critical time for caused their fiscal-year CFCs to engage
the IRS to complete additional guid- amount realized. in gap period transactions, which neces-
ance and for the industry to incorporate sarily occurred during 2018.
that guidance into its procedures. For In October 2018, Treasury and the
example, updates to Form 1042-S, For- a check-the-box election) that would IRS proposed regulations under the
eign Person’s U.S. Source Income Subject cause the relevant transaction to be- GILTI regime with retroactive effect
to Withholding, and its instructions are come disregarded. This letter ruling is (REG-104390-18; the disqualified basis
still needed to fully implement PTP unique insofar as the taxpayer’s stated regulations, now found in final form at
withholding. In addition, the IRS is still motivation for requesting relief was to Regs. Secs. 1.951A-2(c)(5) and -3(h)
revising the qualified intermediary with- mitigate the “negative tax consequences” (T.D. 9866)). Among other things, the
holding agreement, which allows foreign attributable to the extraordinary disposi- regulations generally precluded taxpayers
withholding agents to opt in to special tion regulations. from taking into account basis increases
documentation and reporting rules, to resulting from gap period transactions
incorporate Sec. 1446 withholding for Background (disqualified basis) when computing
the first time. A gap period is relevant for a controlled their GILTI inclusion amount. The
From Tara Ferris, Hoboken, N.J., and foreign corporation (CFC) that has a disqualified basis regulations thus elimi-
Jonathan Jackel, J.D., Washington, D.C. fiscal (U.S.) tax year and a corporate U.S. nated one of the primary benefits of gap
shareholder (a Sec. 245A shareholder). period transactions. By that time, many
Reversing a gap period The term refers to the period (1) begin- taxpayers had executed gap period trans-
transaction through late ning after Dec. 31, 2017 (the second actions. The regulations, however, did
check-the-box election E&P measurement date for purposes not trigger negative tax consequences for
In Letter Ruling 202135006, released of the Sec. 965 transition tax); and (2) those taxpayers.
Sept. 3, 2021, the IRS permitted a tax- ending on the last day of the CFC’s last That changed when Treasury and the
payer effectively to undo planning un- tax year beginning before Jan. 1, 2018 IRS issued the extraordinary disposition
dertaken during the so-called gap period (the last year to which the global intan- regulations — initially in temporary
(described later). gible low-taxed income (GILTI) regime form (T.D. 9865; Temp. Regs. Sec.
After many taxpayers implemented did not apply). 1.245A-5T) in June 2019 and later as a
gap period strategies in 2018, Treasury Before the extraordinary disposition final regulation (T.D. 9909; Regs. Sec.
and the IRS in 2019 issued regulations and other regulations were issued, cer- 1.245A-5) in August 2020. The extraor-
(the “extraordinary disposition regula- tain taxable transactions executed dur- dinary disposition regulations generally
tions”) under Secs. 245A and 954(c)(6) ing a CFC’s gap period were expected apply retroactively to certain transactions
that retroactively neutralized, and in to have favorable tax consequences. occurring during a CFC’s gap period in
some cases penalized, gap period strate- Gain that the CFC recognized in its 2018 (extraordinary dispositions). The
gies. In the letter ruling, the IRS granted gap period (and the corresponding extraordinary disposition regulations
the taxpayer’s request to make a late E&P) generally was not subject to U.S. affect dividends distributed by a foreign
entity classification election (familiarly, federal income tax if the gain did not corporation that has undertaken an

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